Section 86 Reorganizations: Changing Share Classes for Succession or New Investment — CPA Firm Near You, Montreal

Introduction

When a corporation in Quebec needs to bring in new investors, restructure ownership, or prepare for succession, a Section 86 reorganization is one of the cleanest and most powerful tools available. Section 86 allows shareholders to exchange one class of shares for another on a tax-deferred basis, enabling estate freezes, investor entry, restructuring, or share redesign without triggering immediate capital gains. This guide explains how Section 86 reorganizations work, when to use them, and how a CPA near you in Montreal can help implement them properly.

Legal and Regulatory Framework

Under Section 86 of the Income Tax Act, a shareholder may exchange shares of one class for shares of another class without immediate tax, provided the corporation undergoes a share reorganization that meets the technical requirements. Section 86 is commonly used during estate freezes, recapitalizations, reorganizations of share capital, and introduction of new shareholders. Proper documentation is required, including resolutions, amendments to share structure, updated minute books, share certificates, and corporate filings. CRA requires that the exchange reflect fair market value and commercial intent.

Key Court Decisions

Courts have ruled that improper documentation or share attributes invalidate Section 86 reorganizations. Judges have denied tax-deferral benefits where corporations attempted to manipulate valuations or where corporate records did not support the share exchange. Several decisions confirm that Section 86 cannot be used to manufacture artificial tax losses or circumvent attribution or TOSI rules. Courts emphasize that reorganizations must follow legal requirements and reflect genuine commercial purpose.

Why CRA and Revenu Québec Scrutinize Section 86 Reorganizations

A Section 86 reorganization often involves related-party transactions, new share structures, freeze shares, and growth shares. CRA examines whether share attributes are valid, whether preferred shares match stated values, whether the exchange was proportional and justified, and whether documentation supports the new structure. Revenu Québec reviews minute books, corporate resolutions, valuation reports, and filings for compliance with QBCA or CBCA rules. Mistakes increase audit and reassessment risk.

When to Use a Section 86 Reorganization

Estate freezes

Original common shares are exchanged for fixed-value preferred shares while new common shares are issued to heirs or a trust.

Bringing in new investors

Section 86 allows share redesign without triggering capital gains.

Creating multiple share classes

Used to separate voting and non-voting shares or create dividend flexibility.

Corporate reorganizations

Restructuring ownership or recapitalizing a corporation.

Correcting improper share structures

When original incorporation used only one share class or an inefficient structure.

How Section 86 Works: Step-by-Step

Step 1: Evaluate existing share structure

A CPA reviews existing share classes, voting rights, and legal documents.

Step 2: Establish new share classes

The corporation amends its articles to create preferred or new common shares.

Step 3: Exchange old shares for new ones

Shareholders exchange original shares for new classes on a tax-deferred basis.

Step 4: Update minute books

Resolutions, share certificates, registers, and corporate filings must be updated.

Step 5: Issue additional shares if needed

Growth shares for heirs, investors, or a trust can be issued after the reorganization.

Step 6: Ensure valuation consistency

Preferred shares must reflect fair market value at the time of exchange.

Common Pitfalls

Missing corporate resolutions

Without proper resolutions, CRA may reject the reorganization.

Incorrect share attributes

Preferred shares must include redemption rights and restrictions consistent with tax rules.

Poor valuation

Incorrect values may trigger capital gains or shareholder benefits.

TOSI exposure

New share allocations to family members must comply with income-splitting rules.

Incomplete minute books

Documentation failures create legal and tax vulnerabilities.

Mackisen Strategy

At Mackisen CPA Montreal, we design Section 86 reorganizations tailored to succession planning, investor onboarding, or corporate restructuring. We coordinate valuation, amend articles, prepare resolutions, update minute books, draft share exchange agreements, and manage tax compliance with CRA and Revenu Québec. Our team ensures the reorganization is tax-efficient, legally sound, and strategically aligned with long-term business objectives.

Real Client Experience

A Montreal family business performed an estate freeze using Section 86 but had missing documentation. CRA challenged the reorganization. We corrected share attributes, prepared missing resolutions, and defended the freeze successfully. Another client needed to onboard investors but only had one share class; we restructured the capital using Section 86 and issued new participating shares without triggering capital gains.

Common Questions

Is Section 86 the same as Section 85?

No. Section 85 transfers property; Section 86 exchanges shares.

Do I need a valuation?

Yes. Preferred shares must match fair market value.

Can Section 86 be used with a family trust?

Yes, often as part of an estate freeze.

Does Section 86 trigger tax?

Not when implemented correctly.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal implements Section 86 reorganizations that meet legal requirements, minimize tax, and support long-term corporate planning. We ensure complete documentation and audit-ready structures.